Cairn Estate and Letting Agency

A Complete Guide to Buy-to-Let Mortgages

If you want to become a landlord or develop a property portfolio, you’re likely to need a buy-to-let mortgage. These specialist mortgage deals are different to standard mortgages – and it’s important to understand the key differences.

Here’s a useful guide to help you.

Buy-to-Let Mortgages – What Are They?

If you’re intending to buy a property with a view to letting it out, you’ll need a specialist mortgage. In fact, it’s illegal to purchase a property with a standard mortgage if you intend to generate an income from it – so it’s important to let your mortgage lender know exactly what your plans are.

A buy-to-let mortgage is often only available for people who already own a property, and who have a good credit rating. Exact policies differ, but generally speaking, a mortgage provider will also expect to see evidence that you earn £25,000 or more per annum.

How Are They Different?

Buy-to-let mortgages don’t differ that much to ordinary mortgages; and getting to grips with them shouldn’t be too tricky. However, here’s a few key differences that you need to be aware of.

  • Interest-only. The vast majority of buy-to-let mortgages are interest-only. That means, with each monthly repayment, you’re not paying off any of the capital, only the interest owed against the loan. What are the implications? At the end of the mortgage term, you will need to repay the capital – so you’ll need to have your finances in order by then.
  • Interest rates. Interest rates are often higher than standard mortgages, and you’ll need to factor this in when you make a purchase.
  • Higher deposit. As a buy-to-let property purchase is effectively a business move, the minimum deposit required is often higher than with standard house purchases. On average, expect to pay 25% of the property’s value.
  • Specialist fees. Most buy-to-let mortgages also incur specialist fees, which are more expensive than standard mortgage fees.

What Can You Borrow?

When you apply for a buy-to-let mortgage, your provider will want to know more information about the purchase and the potential rental yield. This is so they can establish how much they can safely lend you.

You can get a good idea about how much you can borrow by working out your rental income. The maximum amount you’ll be loaned is directly linked to the rental yield you can expect to generate. If you’re not sure what this is, ask letting agents in the local area, or check online to see what similar properties are making.

Typically, your rental income needs to be at least 25% higher than your monthly mortgage payments.

Important Things to be Aware Of

Like any form of borrowing, buy-to-let mortgages come with risks attached. It’s important not to rely on the sale of the property to repay your mortgage, as property prices are volatile and your house may decrease in value – meaning you’ll have to find the remainder of the money owed from somewhere else.

Unlike other financial products, if something goes wrong, it’s unlikely that you’ll be covered by any consumer protection – so it’s important to make sure your finances are all in order before proceeding with the purchase.